It’s arguably the biggest change dealers have seen in how they run their businesses. But for many it was a case of ‘finally’, after years of speculation and debate.
In the next few weeks, O2 and Orange will virtually eliminate the current model of paying cash up-front for connecting contract customers, instead switching to a model where payments are staggered over the lifespan of the customer’s stay with the network.
Both networks will have incentives in place for dealers to increase customers’ spending and cut churn. The new revenue share model has been mooted for many years, but will kick in for both networks at around the same time.
O2 will start things off from next week on 1 October. O2’s business sales director, Ben Dowd, and David Plumb, head of SME, explained the changes.
Mobile: So explain exactly what you’re doing?
Ben Dowd: We are moving to a revenue-share model with our distribution and stockist partners, so they will have a very small amount paid up-front, and the rest over the customer’s contract. It’s based on revenue billed, churn and ARPU.
Mobile: What’s the reasoning behind it?
Dowd: We want to drive the right behaviours from our partners, and a key part of our strategy is to push for better value customers and move to secondary and tertiary services in data and applications. It was inevitable we would move into revenue share.
Mobile: The first obvious concern for your dealer and distributor partners is surely cashflow. They will be losing money at the point of sale because they are still ploughing a lot of money into handset subsidy. How do you address that?
Dowd: The cashflow impact is clearly a challenge. We are compensating for that with an advance for the first 14 months. So we’re helping out at the beginning and negating any negative cashflow. Once they build up their base they [distributors and dealers] can start managing their base.
Mobile: Can you give us an idea about how much you’re paying?
Dowd: Well, a lot of it is commercially sensitive, but say we advance roughly £300 on day one for a customer; it will be based on roughly £40 per month for 14 months, and then halved. The partner is getting that from day one. At month 15 we do a reconciliation, and from then on it rolls on as monthly payments. The partner will also be able to identify the low and high spenders, and take action based on that.
Mobile: There must have been a lot of concern from your partners to such a radically different model.
David Plumb: We’ve had considerable dialogue with our partners, and as a result we’ve invested in creating stability and certainty for them. There is a two-year contract in place, and an automated commission process to speed up cash flow. It allows them to build robust businesses, and this is us setting our stall out.
Mobile: It will require a big change for your partners, and how they run their businesses.
Plumb: This is not out of the blue. The first few meetings we had was last summer. We’ve had very open contact since then. The investment we’re putting in with the cash advance and the two-year contract is testament to our commitment to them. Two years is longer than any other network. We have demonstrated they are absolutely important to our long-term strategy.
Mobile: What about indirect dealers connecting via a distributor? Distributors will have a big job with their finance teams.
Dowd: It’s a different economic model. You need to be aware of profit and loss, and cashflow. The distributor is also responsible for driving the right behaviours, but there is no reason the distributor can’t manage that relationship. It is undoubtedly an additional challenge.
Mobile: It must give you a lot of protection against fraud, companies going bust and general clawbacks.
Dowd: Issues of clawback are clearly easier to manage. But we’re not thinking of companies going bust in doing this. We are thinking about the fantastic opportunity. The economic climate and market is challenging. This is a way to drive out efficiencies, and we’ve got things in the tool kit that are providing stability.
Mobile: So how many people have you signed up on the programme?
Plumb: There are 85 people we deal with directly. Five of them are distributors on the ‘O2 Advanced’ programme [Avenir, Hugh Symons, Redstone, Fone Logistics and MoCo]. The other 80 are direct independents, value-added resellers and centres of excellence partners.
Dowd: This is not being done in isolation either. I brought the ‘risk and reward’ strategy in a long time ago, and it is based on similar concepts and principles. We also decided to bring the indirect and direct teams under David’s leadership in January. We are having our direct teams and indirect partners working much closer together.
Read more about O2’s business plans and the reaction from dealers and distributors at www.mobiletoday.co.uk